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Legal Perspectives 4929

July 2, 2007

7 Min Read
Legal Perspectives

The April session of the ISS Webinar Series, Legal Learning With Jeffrey Greenberger, raised so many questions on late fees that the subject deserved a column all its own. The crux of the discussion was that a late fee is, by definition, a liquidated-damages clause to a contract. Liquidated-damage clauses are acceptable in contracts when three conditions exist, specifically:

  • Damages are uncertain as to the amount of difficulty to prove.

  • The contract, as a whole, is not so manifestly unconscionable, unreasonable and disproportionate in amount that it doesnt express the true intentions of the parties.

  • The written agreement is consistent with the conclusion that both parties intended the damages and the amount stated should follow a breach of such contract.

If these three factors dont exist, the liquidated-damages clause is most likely to be construed by a court as a penalty. The point made in the webinar was that unless your state has a statute mandating a fixed reasonable late fee (Arizona, California, Kansas, Maine, Missouri, Ohio, North Carolina, West Virginia, Wisconsin and possibly Maryland) and/or you charged late fees multiple times per month or as a percentage of rent, you may risk a tenant who, claiming the charges are a penalty, decides to file a class-action lawsuit.

For some, this may be nothing new, but the question that seems most daunting to operators is: What about other charges that I impose as a result of a late payment? Here are the typical examples I heard during the webinar from operators wondering about legalities of fees:

  • I impose a late fee on the fifth of the month and an overlock fee when I overlock the unit on the 15th of the month.

  • I charge for a pre-lien letter on the 20th of the month.

  • I charge a $25 insufficient-funds fee when a check bounces.

Other charges mentioned were for sending certified mail, advertising and the costs of sale. Heres another question: What happens if a tenant comes in and makes a payment but becomes delinquent again the next month? Can you charge these same types of fees again and again?

For some of these questions I can offer a definitive answer; for others, the answers are harder to find.

Services Rendered

The first thing you need to understand is a late fee (a liquidated-damages clause) is incurred without a service being provided by your facility. Your leases may state that if rent is not paid by a specified date, youll automatically assess the charge without doing anything further to earn it.

The questions above involve providing a service in exchange for imposing a fee. For example, if you impose an overlock charge, I hope its because you actually put an overlock on the unit, making sure its not empty (if the tenant left it unlocked), and entering the information into your computer, logging all your activities. You actually have taken time to prepare the overlock list, to inspect the unit and apply the overlock. Further, you probably sent out an overlock letter and have spent significant time logging all this information into your records.

These activities take time, becoming services in exchange for a fee, compared to simply collecting a late fee because a date came and went. The same is true when sending out a pre-lien notice, inventorying the unit, advertising, etc. Youre often incurring not only the costs in postage, certified-mail fees, advertising fees, etc., but youre also providing a service (required or not) for that fee.

The Real Question

Can you charge these fees and, if so, how much? The answer depends on different factors:

  • Did you list and clearly disclose in your rental agreement that the tenant might have to pay these fees in the event of late payment?

  • Are the fees reasonably related to actual costs for performing these services?

  • What does your state statute allow (if you have one)?

  • Are there any legal opinions to the contrary in your state?

Lets look at two different state statutes to demonstrate what the issue might be. First, Floridas statute provides, The owner of a self-service storage facility has a lien upon all personal property, whether or not owned by the tenant, located at the self-service storage facility for rent, labor charges or other charges, present or future, in relation to the personal property and for the expenses necessary for its preservation or expenses reasonably incurred in its sale or other disposition

This statute is wide and appears to give broad discretion to operators charging for services providing for preservation of property and expenses reasonably incurred in the sale or other disposition. Im not a Florida-licensed attorney, but it seems this includes the costs of overlocking, relocating, sending late notices as well as advertising and sale costs, if reasonably incurred. To legally define reasonable is a subject you should discuss with your state-licensed attorney.

I hear from many operators who charge high fees for sending a pre-lien letter through the regular postal service. If it costs a few dollars in time and materials to send an ordinary mail letter but youre charging $25, Im afraid it will eventually come back to haunt you and the rest of the industry.

Certainly, people have freedom to make contracts. If youve listed a late fee in your contract and the tenant signs, you certainly have an argument that there was a meeting of minds for that fee. Unfortunately, a judge always can rule the fee unconscionable. Thus, the fee needs to be clearly delineated in the contract; it should be reasonably related to costs, and your state statute needs to say its OK.

In West Virginia, the statute says, The owner has a selfservice storage lien on all personal property stored within each leased space for agreed rent, labor or other charges and for expenses reasonably incurred in the sale or destruction pursuant to this Article.

This doesnt sound much different than Floridas language, but the West Virginia state attorney general has interpreted it to mean self-storage operators are only allowed to charge costs for the actual storage rent and labor, and for expenses reasonably incurred in the sale, such as auctioneer services and maybe advertising. Not allowed are charges for pre-lien letters, certified mail, overlocks etc., because these are not expenses of the sale or other destruction. Thus, even though the statute contains slightly different language than Floridas, the ramifications could be monumental.

We dont have state attorney general or case law interpretations in many states expressing opinions on what other fees are enforceable. It wouldnt surprise me to see other attorneys general following West Virginias stance against operators who charge other fees not well disclosed or not rationally related to service expenses. Of course, if your statute is narrower than Floridas, you may not be entitled to collect these sorts of fees.

Monthly Fees

Can you impose these fees every month? If a tenant ends up in default and you charge a pre-lien fee, then he pays the rent but becomes delinquent again next month, assuming your fees are permissible, it seems plausible to charge for each default. Please note this isnt a definitive answer. What I think is very clear is you shouldnt be charging default fees more than once per event. It may seem obvious to only impose one overlock fee per default, but some operators may think differently, albeit not well-advised.

This is a technical legal issue, one well worth discussing with a local licensed attorney who understands self-storage law. Always ensure you are acting, to the best of everyones knowledge, within the parameters of your lease and your state statute, if one exists. A little money spent on this issue could result in a remarkable savings against future litigation over these types of fees. 

Jeffrey Greenberger practices with the law firm of Katz, Greenberger & Norton LLP in Cincinnati. He primarily represents owners and operators of commercial real estate, including self-storage. This column is for the purpose of providing general legal insight into the self-storage field and should not be substituted for the advice of your own attorney. Mr. Greenberger is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. His new website, www.selfstoragelegal.com, contains his legal opinions and insights into the self-storage industry, as well as an article archive. For more information, call 513.721.5151; e-mail [email protected]

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